The lowdown on Armed Forces pensions

A career in the Armed Forces can be incredibly rewarding, allowing you to learn new skills, gain qualifications, and travel the world. And while it’s unlikely to be one of the key motivators when you join, it also has one of the most generous pension schemes.

How does the pension scheme work?

The current Armed Forces pension scheme – AFPS 15 – was introduced in April 2015. It is a defined benefit scheme, based on a system called career average revalued earnings (Care), giving members a pension based on their income throughout their service.

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Unusual among pension schemes, it is non-contributory, with the Ministry of Defence (MoD) paying in the equivalent of 1/47th of pensionable earnings into the member’s pension pot every year. This is increased every year in line with the Average Weekly Earnings Index to ensure it keeps pace with inflation.

Membership of the scheme starts from the first day of service and you must serve for at least two years to be eligible for pension benefits. If you serve until age 60, your pension becomes payable immediately but if you leave before this point, it won’t be payable until state pension age.

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Death benefits are also available, with the partner usually receiving 62.5% of the deceased’s pension and the remaining 37.5% shared among any children. Tax-free lump sums may be available, depending on whether death occurred in service and whether it was before or after the pension became payable.

Although members do not need to pay into the scheme, they can opt out if they want. However, Gary Nock, an independent financial adviser (IFA) at RT Williams, says this is unlikely: “In view of the range of additional benefits, such as ill-health and dependants’ benefits, a member of this scheme would be unlikely to want to opt out.

However, higher ranking officers with long service do need to understand and be aware of the annual and lifetime allowances, £40,000 and £1 million respectively, and how these could affect them. I’d recommend they take advice before considering opting out.”

Can you pay in more if you want to?

Armed Forces personnel can buy ‘added pension’ if they want to increase retirement benefits. “This can increase retirement benefits for the individual and if required, for dependants as well,” explains Colonel Hugo Fletcher, assistant general secretary at the Forces Pension Society. “It’s paid for with either a lump sum or regular monthly contributions and you can build up a maximum additional annual pension benefit of £6,500 over a full career.”

It is also possible to set up a separate personal pension to supplement the occupational scheme. The MoD’s preferred provider is Scottish Widows and its stakeholder pension scheme, but members of the Armed Forces are free to take out any personal pension they like.

What are the options for early retirement?

Given the fact that a full career isn’t available to everyone, Armed Forces personnel are able to leave before age 60. Providing they have completed at least 20 years’ service and have reached age 40 – known as the 20/40 point – they will be entitled to an income from the pension scheme.

This is made up of an income of at least 34% of their deferred pension plus a tax-free lump sum equivalent to 2.25 times its value. Although this is commonly referred to as a pension, the official name for it is an early departure payment.

Although a deferred pension becomes payable at state pension age, you can apply to have it paid early from age 55. In these cases, it will be subject to an actuarial reduction to reflect the fact that it will be paid for a longer period.

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Are there any pitfalls?

Although it is not strictly a pitfall of the pension scheme, husbands and wives of Armed Forces personnel can often find themselves at a disadvantage with their own pension planning.

Al Rush, a former member of the RAF and now an IFA for Echelon Wealthcare and Fiver a Day, explains: “If you’re posted to a new location every couple of years, it can be difficult for your spouse to have a career and build up their own pension, especially if they’re looking after your kids while you’re working.”

Where this is the case, you may want to make private provision for a non-earning spouse using the £3,600 annual pension contribution allowance that is available for non-earners.

Have there been any changes recently?

Yes, like the rest of the public sector, the current scheme was introduced in April 2015 following the Hutton Review. Cost pressures mean benefits aren’t as generous as the two previous schemes – AFPS 75 and AFPS 05 – with the new scheme replacing final salary based benefits with career averaging and pushing up the retirement age from 55 to 60 or state pension age.

Any pension benefits built up before April 2015 are protected and although most members will have been transferred to the new scheme, anyone born before 1 April 1967 will be able to remain in their existing scheme.

How does it compare to other schemes?

Although the benefits have been cut, it remains one of the best public sector schemes. “It is a great pension, designed as a retention tool to keep people in the forces,” says Mr Rush. The fact that it is a non- contributory defined benefit scheme offering an early departure payment puts it head and shoulders above most other workplace schemes.

Where can I get advice?

The scheme is managed by Veterans UK, which is part of the Ministry of Defence. All serving personnel are entitled to ask for a written pension forecast once a year. Alternatively, you can use the Ministry’s online calculator (Mod-abc.co.uk) to get a rough idea of what you might get.

The Forces Pension Societyis also a good source of information and support. “We’re a not-for-profit membership organisation, acting as a watchdog to the armed forces community on pension matters,” explains Colonel Fletcher. “We can explain things in layman’s terms, providing the level of detail that enables our members to make informed decisions.”

There are also IFAs who specialise in this area. Many of these are run or set up by former servicemen and include RT Williams in Brighton (Rtwilliams.co.uk/finance/armed_forces.php), Radcliffe & Co in Wiltshire (Radcliffe-ifa.co.uk/personal-services/armed-forces/specialist-armed-forces-advice) and Rush’s Echelon Wealthcare (Echelonwealthcare.co.uk).